Alexander the Great once said that, once he had conquered the world, he would relax and enjoy himself. Samsung may have come close to conquering the world in handset terms, but the firm knows that it would be fatal to relax at this stage. Instead, the company is shifting its own goalposts and setting out an agenda which it hopes will keep its products relevant and popular despite the fickleness of consumers and the deep changes in mobile behavior. LTE-Advanced leadership, more acquisitions, and in particular a greater focus on software, are all key elements of its determination not to relax and let others come up behind it.
The fact that Samsung’s senior management held its first analyst briefing in eight years is itself a sign of a company that knows it has to change with the times ‘ become geared to user experience as well as hardware wizardry, communicate better. and learn more lessons from Silicon Valley and from arch-rival Apple.
With the TV industry under huge pressure and the current uptick in memory prices not guaranteed to persist, mobile devices are critical to Samsung, as seen in the recent promotion of its mobile division chief, JK Shin, to also be co-CEO. He is bullish about the overall prospects for smartphones and other mobile devices, predicting annual average growth of almost 30% in the LTE handset sector until 2017, by which time this segment will reach 680m units and account for 50% of the total market. That makes the accelerated expansion of LTE services by carriers, and the start of moves to LTE-Advanced, the most important driver for the handset industry and therefore for Samsung as a whole.
Of course, the other key driver is the migration of users, especially in emerging economies, from featurephones to higher value smartphones. Shin said: “We estimate that more than 3bn people are currently using featurephones. So there is still huge demand to upgrade from featurephones to smartphones, and this will be a major market growth driver for the upcoming years.’
Samsung accepts that its Achilles’ heel could lie in software. It has recently been investing considerable sums in addressing this, creating its own flavour of the Android platform with an increasingly rich array of functionality, holding its first developer conference last month, and investing in start-ups via its growing Silicon Valley presence. However, it has a long catching-up process with Apple, whose lifeblood is the software and user experience supported by its devices. Vice chairman Kwon Oh-hyun admitted to the analysts that “even though we’re doing the software business, we’re not as good as we are in hardware’.
CFO Lee Sang-hoon echoed the determination to get better at software, an effort which will require further investment, particularly in advanced R&D and in acquisitions. Samsung has spent about $1bn investing in 14 companies since 2010, but this was ‘somewhat conservative’, Lee conceded, especially when set against the start-up M&A programs of Apple, Google or Cisco ‘ and considering the Korean giant has a cash mountain of about US$50bn, 20% of its market cap. Lee said this stockpile was being made ready for “significant investment” in strategic technologies which could improve the current businesses or open up new ones. “We plan to allocate a significant portion of our annual cashflow into capex and R&D to secure future growth and shareholder return,” he said.
The company will invest $14bn in R&D by the end of 2013, up from $8bn in 2010, with an emphasis on software ‘ though it can’t resist getting back to its more proven expertise, in fancy hardware. One of the advantages nobody, even Apple, can match is Samsung’s wide and deep control of its supply chain, of a kind Nokia enjoyed in its heyday, delivering unmatched economies of scale and cost efficiencies. But the Nokia example shows that even this mighty benefit can be squandered, and Samsung is determined not only to tighten its grip on its ecosystem, but also to bring control of more and more critical elements inhouse. It uses products from its electronics and display units to a far greater extent than in the past, and as the mobile division becomes the main driver of the business, it increasingly influences the strategies of those sister companies.
Although Samsung uses chips from Qualcomm, Nvidia and others, it aims to rely on its own resources for the key differentiating products. Its next projects will include a 64-bit mobile processor, catching up with Apple’s A7, and new ultra-HD and flexible displays. Also like Apple, and Qualcomm, it will look to design processors which are fully differentiated for competitive advantage, moving from standard ARM cores to its own core designs (Qualcomm and Apple, among other major customers, have architectural licences which enable them to modify ARM’s IP).
Stephen Woo, president of System LSI at Samsung Electronics, told the analyst day: “Many people were thinking, why did we need 64-bit for mobile devices? People were asking that question until three months ago. And now I think no one is asking that question. They’re asking, when can we have that?” He added: “We will offer the first 64-bit processor based on ARM’s own core. After that, we will offer an even more optimized 64-bit based on our own optimizations.”
The company is also pushing into the next generation of mobile displays, which are not only important to its own devices but to its leadership of the entire sector. Its next moves will be to bring 4k (3480×2160 pixel) displays to handsets in 2015 and more advanced flexible AMOLED screens.
However, Samsung knows it needs to change its culture and strategy significantly, not just hang onto established strengths. Another big change of direction which goes to the heart of Samsung culture is to seek to create new markets, rather than just expanding in existing ones that have already been carved out by others. The executives’ example was what they call the ‘fonblet’, aka the phablet ‘ more a new dimension than a radical new form factor, and arguably pioneered by Dell, but the general point was clear, and with Samsung’s access to a wide ecosystem of suppliers, ideas and channels, it is in a strong position to initiate or kickstart new segments.
That broad ecosystem and network of channels also have the more immediate advantage of making Samsung hard to beat on cost efficiencies or access to markets, which will be more critical than cutting edge form factors as the smartphone business shifts to emerging economies, with lower prices and massive geographical spread. While the Galaxy family has proved a robust challenger to Apple in developed economies, Samsung’s real engine in overtaking its rival has been its strength in the newer mobile markets. Of course, that is what the lower priced iPad Mini and iPhone 5c were supposedly going to reverse. But the pricing has been misplaced for a real mass market onslaught, and it remains unclear whether Apple wants to be a premium, relatively niche supplier in the emerging economies, or to chase after Samsung’s volumes.
In the latter case it needs new pricing strategies and bolder rethinking of its products ‘ more localized content, more attention to services that work well over second-rate connections, broader channels. After all, it was the failure to invade India that ultimately did for Alexander and his dreams of retirement, and India has been a bugbear for Apple too ‘ its price sensitive, almost wholly prepaid market being a challenge for the iPhone, however desirable.
In fact, Apple is seeing growth in Indian sales. According to its recent financial report, its revenues in the country were up by 51% for its 2013 fiscal year, reaching $491.07m, but this came at the expense of a drop in profits from $604.6m to just $18.25m. Even the healthy sales growth disappointed analysts who had predicted that the company’s Indian revenues would break the $1bn barrier, and market share was up by only 2% to just under 3%, while Samsung enjoyed a 32% rise in share in the same period. The pressure on Apple’s profits came mainly from special promotions to shift more of the old iPhone 4 models, and so increase market share, and they raise the long-discussed issue of whether the vendor should create a model fully geared to emerging markets ‘ not the compromise of the 5c – and perhaps one specifically for India, even made in the subcontinent.
India is not the only high growth market where iDevice pricing is a problem. Russia’s big three cellcos ‘ MTS, VimpelCom and Megafon ‘ had backed away from the iPhone, complaining of excessive prices and sales targets. However, the first two returned to the fold with the recent iPhone 5s and 5c launches, though Megafon remained cold, having not sold the iPhone since 2009. However, just weeks after MTS and VimpelCom announced they would sell the new models, their enthusiasm may die because of the pricing issue. Apple’s market share in Russia is only about 8% in a country where subsidies are barred, while Samsung has over 50% of the space. The ‘low cost’ iPhone 5c will still cost almost $800 in Russia ‘ equivalent to the average monthly income in the country.
The most important smartphone market, of course, is China, where Apple also has sub-10% share. It is making progress as average incomes rise and consumers move across to 3G. According to Canalys, it had market share of 8% in the third quarter, but had seen a 32% year-on-year rise in iPhone sales and overtaken ZTE to grab fifth place in the smartphone sector.
However, to get into double-digit share, it will be under pressure to produce region-specific models which can address different price points. Since it has already (belatedly) customized a special TDD version for China Mobile, this should not be a big leap. Whether it likes it or not, gaining market share in major emerging economies will not just be about adjusting the pricing, but supporting local distribution habits, consumer behavior and services.